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The Home Office Deduction: Not Taboo Anymore!

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In the past, there were a lot of naysayers who avoided the Home Office deduction because they thought it might be a red flag for an audit, but the truth is;  in today’s economy, working from home is a common occurrence. The IRS processed over 100 million returns that were e-filed in 2010 and the home office deduction is the least of their concerns. Millions of people are flocking to home based businesses due to the high unemployment rate,  loss of salaried positions, lure of unlimited income potential and to spend more time with their families and avoid the cost of commuting.  It is no longer a taboo to include it on your return, rather it is a smart tax decision and costly mistake if you don’t, assuming you qualify  One of the biggest reasons for including this deduction is to lower your self employment tax.  You will save yourself 15% in self employment taxes on each dollar that you deduct as a home office expense on your Schedule C.  These types of expenses include mortgage interest, home insurance, utilities, repairs, cleaning, security systems, association dues and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes.

Now there are two basic requirements for your home to qualify as a deduction:

1. Regular and Exclusive Use.  You must regularly use part of your home exclusively for conducting business. For example, if you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom.

2. Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

The way to calculate the business portion of the rent expense is to divide the amount of square feet used for business purposes by the total square footage of your home.  Please note that the business must be up and running to treat this expense as business expense. So if you started your business in July, you could only claim the business expense from July forward.   I hope this information helps you understand a little more about the home office deduction.  If you have any questions or if you’d like to find out if you qualify, please contact me as I’d be happy to discuss the benefits with you and your the eligibility requirements in more detail.

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